Lost UK influence over EU financial services regulation could come back to bite the City
Theresa May’s suggestion at the European Council meeting in Brussels last week that the UK would continue to play a role in EU institutions and their respective decision-making processes post-Brexit was met with thinly disguised incredulity by European leaders.
Manfred Weber, leader of the European People’s Party in the European Parliament, commented after the meeting: “when somebody wants to leave a club, it is not normal that such a member wants to decide about the future of this club”.
In the midst of the debate over hard or soft Brexits, the future of passporting and the role that regulatory equivalence determinations might play in preserving UK access to the EU’s financial services market, one fact is indisputable. Since 23 June, the UK’s influence within EU institutions has steadily begun to wane. Nowhere has this been felt more keenly than in the area of financial services, where the UK’s most senior representative in Europe, Lord Hill, stood down from his role as commissioner in charge in the wake of the vote to leave.
What is also clear is that, upon leaving the EU and in whatever form that may take, the UK will likely no longer play any role in shaping EU legislation. This is important, not least for financial services, an industry representing over 10 per cent of the UK’s GDP.
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The UK has long leveraged its position as the leading EU financial centre, with a number of systemically important financial institutions, in influencing both international standards and EU legislation. In analysing the impact of the UK’s loss of influence over such developments, it is instructive to look at how the UK has been largely successful in shaping EU financial services legislation over the past decade.
In implementing Basel III, for example, the Commission put forward proposals on the harmonisation of capital requirements throughout the EU. The UK, concerned that this represented a threat to its post financial crisis policy objective of ensuring tougher capital requirements for domestic banks, negotiated a compromise position ensuring that individual member states would be permitted to set higher regulatory capital reserve requirements without prior permission from the EU.
In recent years the UK has, in the face of broad opposition from EU member states, been able to safeguard its funds industry by avoiding significant restrictions on fund managers’ ability to launch and market offshore funds by preserving (temporarily at least) the National Private Placement Regime. Additionally, the UK has been the main exponent for the granting of marketing passports for non-EU based fund managers, the introduction of which had been expected in the coming two to three years.
Ironically, it is in the areas of passporting and non-discriminatory access to markets that the UK has most effectively wielded its influence. Absent from MiFID I, a harmonised third-country access regime was one of the UK’s key policy objectives during legislative negotiations on MiFID II. Proving to be one of the most controversial topics throughout negotiations, a compromise was finally reached which permitted non-EU states partial, reciprocal access based on an affirmative determination by the Commission that their regulatory framework in the provision of financial services was equivalent to EU rules.
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Likewise on EMIR, the UK used its influence not only to ensure a framework for third-country market access, but also to ensure non-discriminatory access to clearing houses, following heated debate over the appropriate venue for the clearing of euro-denominated derivatives trading.
Should the UK’s future financial services industry depend on either the continuation of passporting rights or, perhaps more likely, qualified and conditional access to EU markets based on an affirmative determination of regulatory equivalence, the UK would be well placed from both a legal and structural perspective, operating within a regulatory framework largely of its own creation, to ensure that any impediments to trading and offering financial services are limited in the short term.
But operating under the grace of regulatory equivalence determinations in the longer term presupposes that UK financial services legislation keeps pace with European developments in future. Without the UK’s influence, the evidence suggests that EU legislation may assume a more protectionist slant, with greater harmonisation within the Single Market, greater concentration within the Eurozone, and less scope for the kind of opt-outs that the UK has historically been successful at obtaining.